U.S. Oil Outlook: Gasoline prices will continue to fall

Between the beginning of October and the end of February, U.S. average heating degree days were 13% higher than last winter (indicating colder weather) and 10% above the 10-year average. The Northeast was 13% colder than last winter, the Midwest and South both 19% colder, while the West was 5% warmer. The cold weather had the greatest effect on households in the Midwest that primarily use propane and those in the Northeast that rely on heating oil. EIA's current estimate for winter heating expenditures for homes heating with propane in the Midwest is $2,212, which is $759 higher than projected in October. The current estimate for average U.S. expenditures for homes using heating oil is $2,243, which is $197 higher than projected in the October STEO. Unlike residential electricity and natural gas markets, where rates paid by consumers do not immediately reflect price spikes in the spot market, price movements in propane and heating oil are quickly reflected in retail prices.

U.S. Liquid Fuels Consumption

Total U.S. liquid fuels consumption rose by an estimated 400,000 bbl/d (2.1%) in 2013. Consumption of hydrocarbon gas liquids registered the largest gain, increasing by 150,000 bbl/d (6.4%). Motor gasoline consumption grew by 90,000 bbl/d (1.1%), the largest increase since 2006. Stronger-than-expected growth in highway travel during the second half of 2013 contributed to that increase. Distillate fuel consumption increased by 90,000 bbl/d (2.5%), reflecting colder weather and domestic economic growth.

Harsh winter conditions over the past few months negatively affected well completion activity in the northern U.S. plays. As more evidence of this seasonal slowdown has appeared in the data, EIA has revised downward initial estimates for December 2013 and January 2014 U.S. crude oil production. Because the weather effects are temporary, much of the production slowdown is expected to be made up by accelerated completion activity over the next few months.

EIA expects strong crude oil production growth, primarily concentrated in the Bakken, Eagle Ford, and Permian regions, continuing through 2015. Forecast production increases from an estimated 7.5 million bbl/d in 2013 to 8.4 million bbl/d in 2014 and 9.2 million bbl/d in 2015. The highest historical annual average U.S. production level was 9.6 million bbl/d in 1970.

Crude oil production from the Bakken formation in North Dakota and Montana averaged 0.9 million bbl/d in 2013. While production briefly reached 1.0 million bbl/d in November 2013, logistical issues resulting from winter storms caused production to decline in December. Bakken production is expected to return to 1.0 million bbl/d in the first quarter of 2014. Production in the Eagle Ford formation in South Texas averaged 1.1 million bbl/d in 2013, reaching an estimated 1.3 million bbl/d in December 2013.

U.S. federal Gulf of Mexico (GOM) crude oil production averaged 1.3 million bbl/d in 2013, down slightly from 2012. EIA forecasts 1.4 million bbl/d of GOM crude oil production in 2014 and 1.6 million bbl/d in 2015. Production growth in 2014 comes from eight projects expected to come on line: Jack, St. Malo, Entrada, Big Foot, Tubular Bells, Atlantis Phase 2, Hadrian South, and Lucius. Further production growth in 2015 comes from an additional 10 projects: Axe, Cardamom Deep, Dalmatian, Deimos South, Kodiak, Pony, Samurai, West Boreas, Winter, and Mars B.

As domestic production of crude oil continues to increase, U.S. refiners have announced expansions to process more light crude oil. Marathon and Kinder Morgan have announced plans to build condensate splitters in 2014 and 2015 to process production from the Utica and Eagle Ford formations. Small topping refineries are being built in North Dakota to process Bakken crude, and Valero is expanding its Gulf Coast refining capacity. Projected crude oil inputs to refineries increase from 15.31 million bbl/d in 2013 to 15.52 million bbl/d in 2014 and rise further to 15.61 in 2015, surpassing the previous high of 15.48 million bbl/d in 2004.

The growth in domestic production has contributed to a significant decline in petroleum imports. The share of total U.S. liquid fuels consumption met by net imports peaked at more than 60% in 2005 and fell to an average of 33% in 2013. EIA expects the net import share to decline to 25% in 2015, which would be the lowest level since 1971.

U.S. Petroleum Product Prices

Led by falling crude oil prices, the projected U.S. annual average regular gasoline retail price, which fell from $3.63/gal in 2012 to an average of $3.51/gal in 2013, will continue to fall to $3.45/gal in 2014 and $3.37 in 2015. Diesel fuel prices, which averaged $3.92/gal in 2013, are projected to average $3.85/gal in 2014 and $3.78/gal in 2015.